The U.S. economy has enjoyed uninterrupted growth since the trough of the last recession in the spring of 1991. As unemployment has declined to just over 5 percent, attention has turned increasingly to issues of longer-run macroeconomic performance. Now, the topics of economic fluctuations and growth also are combined in a single NBER program, since the economic fluctuations program has taken over the functions of the earlier growth project (officially becoming the Program in Economic Fluctuations and Growth in early 1996). This continues to be the largest of the Bureau's research programs, with roughly 60 research associates and 25 faculty research fellows.
Many of the research activities of the "EFG program" take place in small groups working on specific topics. These groups are open, and some group members do not have formal affiliations with the NBER. The small groups' work is described in some detail later in this report. Almost all of these groups also meet in Cambridge in July as part of the Bureau's Summer Institute. At that time, the entire program also meets to present and discuss six academic research papers. The small groups meet during the academic year on their own, or in conjunction with other NBER program meetings, as well. Finally, the EFG program is responsible for the NBER's Annual Conference on Macroeconomics, which takes place in Cambridge each March.
The 1995 Nobel Prize in Economics
Robert E. Lucas, Jr. of the University of Chicago, an active member of the EF program since its inception in 1978, won the 1995 Nobel Memorial Prize in Economics. The prize was announced shortly before the program's research meeting in October 1995, after Lucas had agreed to serve as a discussant at the meeting; this happy event was acknowledged in a suitable way at lunch. Also, program member Stanley Fischer and I were asked by the Scandinavian Journal of Economics to prepare papers summarizing Lucas's many contributions.
Program Members in Washington
Members of the EFG program have held a number of important policymaking and advisory positions in Washington. For example, John B. Taylor of Stanford University served as a member of the Council of Economic Advisers under George Bush, and Martin Neil Baily was a council member under President Clinton. Joseph E. Stiglitz currently serves as chairman of the Council of Economic Advisers; Lawrence H. Summers is deputy secretary of the U.S. Treasury, and Alan S. Blinder of Princeton University served until recently as vice-chairman of the Federal Reserve Board of Governors.
Business Cycle Dating
Traditionally, the Business Cycle Dating Committee has been the most conspicuous public element of the EFG program. The committee last met in 1992 to determine the date of the end of the recession of 1990-1. With the nonstop growth of the economy since that meeting, the committee has not met again; it will not meet until well after the economy reaches a peak of activity and begins a new recession. At this writing, there is no sign of impending recession, and the experimental recession probability index prepared by program members James H. Stock of Harvard University and Mark W. Watson of Princeton University assigns a low probability to a recession in the near future.
Under the leadership of program members Ben S. Bernanke of Princeton University and Julio J. Rotemberg of MIT, the EFG program organizes a major conference on macroeconomics each year. The proceedings appear in the NBER Macroeconomics Annual, published by the MIT Press. The organizers choose authors from among those who have recently developed important new lines of research in macroeconomics; the format of the conference and volume permits a fuller expression and integration of the research than is possible in major economics journals, in which the line of research usually has been exposed already. The emphasis of the Annual is on basic quantitative research with potential policy applications.
Small Research Groups
The first meeting of the newly formed "Growth Group" focused on the accumulation and development of human capital, finding some surprisingly paradoxical results and developing exciting avenues for future research. Lant Pritchett of the World Bank presented cross-sectional evidence that the growth of human capital, as measured by years of education, is completely uncorrelated with the growth of output. This result is surprisingly robust to the use of different datasets, as confirmed by conference participant Jong-Wha Lee, NBER and Korea University, who, together with Robert J. Barro, NBER and Harvard University, has developed a broad international database on education.
The conventional measure of human capital, the years that students devote to education, is extraordinarily crude, providing inadequate assessment of the value and growth of human capital. Dale W. Jorgenson of Harvard University presents new estimates of the value of the output of the U.S. educational sector. Jorgenson places the valuation of human capital on an equal footing with the valuation of physical capital by using lifetime earnings profiles to estimate the net present value of the additional earnings induced by an additional year of education. Gary S. Becker and NBER Research Associate Kevin M. Murphy, both of the University of Chicago, pushed the discussion further, showing how differences in the earnings of U.S. workers by country of origin could be used to infer differences in the value of their educational attainment and, by extension, to develop deflators for the nominal output of the educational sector. The application of these methods to broader international comparisons appears to be an essential first step in unraveling the puzzle posed by Pritchett and others.
Income Distribution and Macroeconomics(3)
This group has concentrated on three broad topics of significant importance to the U.S. economy. First, researchers have identified four channels through which income distribution affects growth and macroeconomic activity. Inequality, in the presence of imperfections in capital markets, may affect investment in human and physical capital adversely and therefore may reduce output...